U.S. stocks had a smooth ride in the third quarter with the S&P 500 notching a gain of 3.3%, representing the best quarter of 2016. In fact, this was the largest rise since the final three months of 2015 (read: Top Sectors of Q3 and Their Best ETFs).
The impressive rally was driven by better-than-expected earnings reports, higher oil prices and a more accommodative Fed monetary policy. The trend is likely to continue in the fourth quarter as well given renewed investor confidence in the market. This is especially true against the backdrop of the Fed’s continued dovish stance, increased chances of the Democrat candidate, Hillary Clinton, winning the November election and the OPEC agreement to cut oil output.
In fact, recent consumer sentiment surveys have been extremely positive with the monthly Consumer Confidence Index, measured by the Conference Board, climbing for the second consecutive month in September and currently hovering at its highest level since the recession. Consumer confidence, as per the final University of Michigan, climbed for the first time in four months, with the index rising to 91.2 in September from the preliminary reading of 89.8. These suggest increased spending and thereby pave the way for better economic growth.
Additionally, after four straight quarters of negative profit growth, the third-quarter earnings season for the S&P 500 index is expected to be the turning point wherein growth could come by, as per earnings tracker Thomson Reuters I/B/E/S. However, volatility is the key concern for the final quarter of 2016 given corporate earnings, the presidential election, the final OPEC deal, and the possible rate hike by the Fed in December. All these will continue to weigh on investor sentiment (read: OPEC Surprises With Production Cut: Energy ETFs Soar).
Against such a backdrop, investors could be well served by looking at the ETFs and stocks of the top-performing sectors.
How to Find the Top-Performing Sectors
While identifying the top-performing sector is a daunting task, the Zacks Industry Rank makes this process simpler. The Zacks Industry Rank is determined by calculating the average Zacks Rank for each stock in the industry and then assigning a rank to it. So first, we selected the best industries that have a top Zacks Rank.
A top Zacks Industry Rank means that more stocks within that group are seeing upward earnings estimate revisions. Since an industry is a group of stocks in a similar business, this is the perfect way to size it up (read: all the Top Ranked ETFs).
The Zacks Industry classification divides the business world into 16 sectors comprising 60 medium or M-level industries and 260 plus or X-level industries. We rank all 260 plus X-level industries based on the earnings outlook of the constituent companies in each. Lower scores are always better. Industries with ranks of 2.00–2.64 and 2.65–2.81 are very attractive and attractive, respectively, and are thus the top-performing ones.
The technology sector has been on a fire on improving fundamentals, investors’ drive for cheaper valuation and renewed focus on beaten down growth stocks. It has staged a strong turnaround from the two previous quarters of negative earnings and even surpassed the S&P 500. Semiconductors and miscellaneous technology are the most attractive sectors at present, followed by electronics.
Vanguard Information Technology ETF (VGT - ETF report) : This fund provides exposure to a large basket of 377 technology stocks by tracking the MSCI US Investable Market Information Technology 25/50 Index. It is highly concentrated on the top three firms collectively accounting for 31.8% share while other firms hold no more than 6.3% of assets. The product is well spread out across a number of sectors with Internet software & services, technology hardware & storage, system software, semiconductors and data processing & outsourced services each accounting for a double-digit allocation each. It manages about $9.8 billion in its asset base and has 0.10% in expense ratio. Volume is good at nearly 359,000 shares. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook (read: 4 Best ETFs & Stocks to Tap the Tech Boom).
NetApp Inc. (NTAP - Analyst Report) : This Zacks Rank #1 company is a leading provider of innovative data management solutions. It saw positive earnings estimate revision of 23 cents for fiscal 2016 over the past 60 days, with an expected growth rate of 16.86%. The stock has a VGM Style Score of ‘A.
The industrial sector is set to rebound with a recovering manufacturing industry. This is especially true as manufacturing activity strongly rebounded in September with the ISM index rising to 51.5 from 49.4 in August. As such, metal fabricating falls in the most attractive industry and is expected to continue outperforming followed by containers & glass, machinery and pollution control.
First Trust RBA American Industrial Renaissance ETF (AIRR - ETF report) : The ETF offers exposure to the small and mid cap securities in the industrial and community banking sectors by tracking the Richard Bernstein Advisors American Industrial Renaissance Index. Holding 42 stocks in its basket, the fund is pretty well spread across components with none holding more than 5.12% share. In terms of industrial exposure, engineering and construction and industrial engineering take the top two spots with a combined 58% of the portfolio. The product has $30.5 million in AUM and trades in a light volume of around 10,000 shares per day on average. It charges 70 bps in fees and expenses and has a Zacks ETF Rank of 2 with a High risk outlook (read: Time to Play These Industrial ETFs?).
Berry Plastics Group Inc. (BERY - Snapshot Report) : This Zacks Rank #1 company is a manufacturer and marketer of value-added plastic consumer packaging and engineered materials. The stock saw impressive earnings estimate revision of 26 cents for fiscal 2016 over the past 60 days and is expected to grow at a solid rate of 35.3% versus the industry average of 6.52%. The stock has a VGM Style Score of A.
Utility is the most attractive sector at present with water utility and telephone leading the way. It is considered defensive play and is unaffected by economic cycles and politics. Utilities offer solid dividend payouts and excellent capital appreciation over the longer term. Apart from these, the sector is benefiting from an ever-expanding population, which is fueling demand for utility supplies like water, gas and electricity.
Utilities Select Sector SPDR (XLU - ETF report) : With AUM of $7.5 billion, this fund provides exposure to a small basket of 30 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top four holdings with one-third of the portfolio. Electric utilities takes the top spot in terms of sectors at 62.2%, closely followed by multi utilities (33.5%). The product charges 14 bps in annual fees and sees a heavy volume of more than 14.9 million shares on average. It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: 3 Utility ETFs Gaining on Abating Rate Hike Prospects).
ONE Gas Inc. (OGS - Snapshot Report) : This Zacks Rank #2 company is a natural gas local distribution company. It saw positive earnings estimate revisions by a couple of cents for fiscal 2016 over the past 60 days, and has an expected above-average growth rate of 16.39%. The stock has a VGM Style Score of B.
The consumer discretionary sector is also expected to outperform with consumer electronics at the top, followed by other discretionary items. The sector tends to do better in the early phase of an economic recovery, characterized by stepped-up activities, accommodative policy, increased consumer confidence and improving sales and profits (read: Clinton Apparently Won First Debate: ETFs in Focus).
Vanguard Consumer Discretionary ETF (VCR - ETF report) : This fund follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 386 stocks in its basket with the top firm taking the maximum share at 10.4%. Other firms hold no more than 5.6% of assets. Specialty retail, Internet retail, and restaurants are the top three sectors accounting for a double-digit exposure each. VCR is the low choice in the space, charging investors just 10 bps in annual fees while volume is moderate at nearly 81,000 shares a day. The product has managed about $1.9 billion in its asset base so far and has a Zacks ETF Rank of 3 with a Medium risk outlook.
Party City Holdco Inc. (PRTY - Snapshot Report) : This Zacks Rank #2 company is involved in designs, manufactures, contracts for manufacture and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery. It saw earnings estimate revision of a penny for 2016 over the past 60 days. This represents a substantial growth rate of 21.58%.The stock has a VGM Style Score of A.
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